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What are lows in interest rates, energy and commodities telling us?

The interest rate rule-of-thumb is that 10 year government bonds are approximately equal to nominal GDP.  Global and US nominal GDP forecasts for 2015 are in the ballpark of 4.8%.   The rule-of-thumb is obviously out of kilter when we consider current 10 year government interest rates from around the world:

Russia 16.05%

Greece 8.68%

India 7.77%

Brazil 4.14%

China 3.59%

New Zealand 3.42%

Mexico 3.33%

Portugal 2.63%

Australia 2.56%

South Korea 2.38%

Singapore 1.92%

United States 1.86%

Italy 1.72%

Canada 1.57%

Spain 1.54%

Britain 1.51%

Hong Kong 1.46%

France 0.65%

Netherlands 0.48%

Germany 0.42%

Japan 0.42%

Japan 0.24%

Switzerland 0.15%

High interest rates in Russia and Greece are due to extreme inflation not economic growth [nominal GDP is the sum of real GDP plus inflation].  Low rates in Japan and Western Europe are a reflection of deflation and recession.

US interest rates are declining in spite of the Federal Reserve ending Quantitative Easing (QE3) and reported economic growth.  In fact, the US 10 year Treasury has only been lower during the summer of 2012 prior to the Fed starting up the printing presses to begin QE3.  [A burgeoning economic recovery should be accompanied by higher interest rates.]

With the S&P500 at allegedly fair value and within 4% of record highs, why are rates at historic lows?  The most likely answer is that Emerging Market slowdowns and recession in Japan/Europe are exporting deflation to the US.

So why aren’t US equity markets even higher?  Why would investors want to tie their money up in low yielding Treasuries if stocks supposedly offer an 8% total return?

Fear must be overtaking greed.

Oil and copper prices (both barometers for economic growth) are at 6 year lows, reflecting a soft global market for all commodities.

The world is experiencing a triple convergence of CHEAP money, energy, and commodities- we’re either poised for explosive growth or a major correction.


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